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Company Explains Impact of Loan Modification on Credit Score

By Sally Maison
Published: Tuesday, November 10th, 2009

Restructuring a home loan term, whether through forbearance, short sale or modification, has a relatively small impact on a consumer’s credit score, says Sarah Davies, vice president of VantageScore, during her lecture the Loan Modifications Conference at the Westin City Center in Dallas, Texas.

Company Explains Impact of Loan Modification on Credit ScoreVantageScore is a credit scoring model which measures the likelihood of a consumer of running into 90-day plus delinquencies using a scale which ranges from 501 to 900. Three of the top 10 loan originators and eight of the top 25 financial institution in the housing industry are using the consumer rating system.

According to the company which developed VantageScore, if a mortgage lender reduces a borrower’s original loan amount by 10% to 30%, the consumer’s credit score will only go up by three to 18 points, depending on the borrower’s initial standing.

Borrowers who are standing at prime rates, those who average at 862, will only see their credit score rise up by three points. Those who are struggling with their rating will get greater help since they their score could jump by 18 points if they are lingering around the 625 mark.

Davies explained that a credit score goes up during loan modification because the total amount of debt owed goes down. This consequently makes a consumer a more reliable borrower since her likelihood to default will deflate. They advise homeowners who are struggling with their payments to discuss a modification with their creditor since going for other options, such as bankruptcy, short sale, and foreclosure, has a far greater negative impact on their credit score.

If a homeowner who maintains a good credit is foreclosed, her score could go down by as much as 140 points. This would instantly turn a consumer from being a super-prime to a subprime borrower.
A consumer with a good credit score who decides to file for any type of bankruptcy will see her ratings by 365 points. Additionally, the bankruptcy filing will remain on a credit report for seven to 10 years, depending on the specific circumstances and the type of bankruptcy filed for.

Experts also say that delinquency on a mortgage has a far more serious effect on a credit score than a loan modification. Delinquencies occur when a borrower is more than 30 days behind her mortgage payments. It can hurt a credit score as much as a foreclosure, short sale, or bankruptcy does.

Consumers who are way behind their mortgage are encouraged to do their best to keep their payment current. Specialists say this will involve a lot of catching up with bills but it can improve a credit score just within nine months.

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